Controlling Food Costs in the Restaurant Industry
The top two costs associated with owning a restaurant is labor and food. Controlling these prime costs in effect is the bottom line in your business. How do you control food costs? First identify the correct quantity and quality of food you serve. Next, look at the flow of food on a daily and weekly basis. Finally, evaluate tools and techniques to reduce food volume and waste. By taking these steps, an owner of a restaurant can set and control the costs.
Depending on the restaurant and the product you serve, food costs can be as low as 12% to more than 70% of the total costs for your business. A lot depends on the nature of your food. I had a client that all he did was French Fries. On the weekends, he would pull his trailer to the area’s gathering event, put oil into the deep fryer and cook away. People were lined up to buy the fries. He would buy a 100 pound bag of potatoes for around $28 and produce about 80 orders of fries. He sold the fries for $3.00 so his cost for the raw material was a meager 11.67%. Of course there’s some oil and the condiments so his overall costs were closer to 25% related to getting that basket of fries delivered.
At the other end is your custom order high end restaurant. Here this client delivered seafood custom made to the taste of the diner. The waste factor alone was off the charts; I could not believe how much he spent. Of course there were several errors in the methodology of purchasing, storing, and cooking the food that drove costs further up. But, you can imagine his performance in the long run. He finally went out of business but I was able to gain an understanding of the tools and techniques a restaurateur uses to keep food costs down.
Let’s walk through the best way to address food costs.
Step 1 – Identify the Correct Quantity and Quality
Think of yourself as the head chef and work from there. There are three different groupings of the food for the restaurant. First group are your spices and condiments. This one is pretty easy to figure out. Once you have your core inventory, it’s a matter or resupplying the group on an as needed basis. It is rare for any of the spices to go bad in a short period of time, so the critical human factor here is good rotation of the supply. For the French fries client above, his biggest mover in this group was ketchup. He pretty much told me that with the volume that he runs on a weekend, he buys his stock each week just before the event. Any leftover stock from the prior event is used first. There is no rotation issue for this condiment. For him, the question is the quality of the condiments. He buys a national brand of ketchup and he told me that the two biggest brands are Hunts and Heinz. His customer does not see the label, they just want ketchup. Whatever is on sale, he buys that brand. He says it keeps his costs down.
As for the other items including spices etc. he just buys it once it has been consumed because he can get it anywhere he is located. Vinegar and special spices are all at the local grocery store. He rarely goes to that market because he has enough experience to maintain adequate quantity.
The second group is the supplies group. From the oil and butter to cook with to the napkins you use, this group is easy to address. There is such a low waste factor that quantity is not the core element of the cost, it’s the quality of the product you buy. The quality determines the final cost factor.
Notice in the first two groups, the quality issue is what governs the final total cost for each group. There is very little need to be concerned with quantity because it will get consumed before the product goes bad or out of date. Key in on quality to control costs in the first two groups of food.
The third group is the real cost driver in a restaurant. The food you actually prepare and deliver to the customer. You don’t want too much quantity on hand as you will have to concern yourself with out of date food. You also need enough to cover the demand of the customer. Notice that in my example of the French Fries Guy, his is really the best situation. He has one raw product to cook, he buys the potatoes in 100 pound increments and he stores the left overs in a refrigerator until the next event. Potatoes have a long shelf life and so for him, he has no dating issues to address. He does not have to worry about quantity because what is not used will be consumed the following week. He did tell me that there is a quality issue involved. I asked him how so; I mean to me a potato is a potato. No, he said, some are engineered for different purposes such as baking or taste etc. But he did a lot of reading up on the subject, testing for cooking and taste and determined that a fair quality potato commonly found at the grocery store was his favorite to use. He found a local supplier to provide him with the whole potato in 25 pound bags. He washes and cuts the tips off and then pushes the potato threw a slicer about 3 minutes before he cooks them. They are fresh when made.
For the guy that has 40 different entrees and 20 different side dishes, the quantity and quality become a more convoluted issue here. For this, I suggest that you identify the top six sellers and start there first. Determine the quantity of these and the quality you will need to satisfy the tastes of your diners. Once done, determine the frequency of delivery of the food from your suppliers and then generate a cycle period as it relates to these core six sellers. As it relates to the other items, the key question becomes storage of the food to keep it fresh. What is the life expectancy of the food once you receive the food from the supplier? What is the best storage method? What does the health code say? All of these questions become an element of the best answer for quantity, delivery cycle, and quality of food. Look at your suppliers and ask them what is the best way to address the cycling or maintaining freshness of this food. Maybe they receive their orders at certain times, thus freshness can be better if it gets delivered to you after they receive their shipment. As for the really critical items like seafood, can you switch suppliers that buy and deliver directly to you? The idea is for you to not only generate a needs schedule, but a delivery schedule and a life expectancy schedule for each main entree on your menu. From here, you should be able to create regular ordering groups and get your food in a ‘Just in Time’ inventory system.
As for quality and keeping costs down, consider options such as eliminating high risk entrees. For the client that ran the custom ordered seafood restaurant, he had one item that was requested about 6 times a week. He kept this fish fresh and had it brought in every three to four days. Because of the quantity issue, he was paying out about two times as much for the food as he received in revenue from that item on the menu. He was throwing away money. If he just eliminated that item on his menu, he would cut food costs significantly in his restaurant. You have to address each food item just like this in order to reduce the overall costs.
Another tool is substitution for some food items. This is a quality issue. Can you find substitutes that are less expensive and not take away from the quality of the food you deliver? Wine is a great example of this. I drink wine and have learned to appreciate the taste. However, once I’ve had one glass, I really can’t taste the second glass as well because my taste buds have been numbed by the alcohol. I switch to the cheaper stuff once I’ve had a nice glass of wine. I also noticed that the $7 bottle is just about as good tasting as the $12 bottle. Thus, I buy the $7 bottle to start out with and then convert to the $4 stuff once I’ve had a glass. It keeps my costs down and I can’t tell the difference. Well, I’m pretty confident this is true with food. Can you substitute the cheese with a less expensive cheese that still has the same characteristics and flavor? How about your meat? Are there substitutes that you can try to see if they meet the same taste and characteristics of the higher quality items you currently have? My seafood client ordered his seafood from a particular supplier. He said it was better food? I don’t understand? Where did this supplier get his crustaceans? Is there a particular part of the ocean where the lobster feed on high quality scraps? I don’t think so; I mean I know about lobsters, I served on a lobster boat for some period of my life. There’s nothing special about them. You don’t want to eat a 4 pound lobster because the texture is different than a 1.5 pound lobster but overall lobsters are not picky about what they eat. I also understand about deliver times etc. but if you can find a substitute providing all the same elements as your current supplier and he can do it for less, why not switch? Ask yourself if you can substitute this particular menu item with something less expensive. This does not mean the quality goes down.
Step 2 – Flow of Food
As the owner of the restaurant, look at the flow of food through the system. How much is really consumed on a daily and weekly basis. Stay focused on the primary six top sellers. Create a flow chart that illustrates from the point of ordering the food to the point it leaves the restaurant in the customer. Identify the stop points. When the item is delivered, does it stay on a cart to get loaded into the refrigerator? While in the refrigerator, how long does it stay in there? From the refrigerator to the prep area, how long will it stay on the preparation table? Does any of the food go back to the refrigerator for use the next day? Identify these critical junctures to identify possible loss points for the food. How much is lost in the cooking process? Does the chef make decisions on determining cuts i.e. cutting away material to increase quality of the delivered item? What happens to these scraps?
Once identified, look at all the critical junctures and determine if there are ways to reduce losses. If the chef tells you that he cuts away a good portion of the meat because of poor quality and you are buying that meat on a cost per pound method; can you switch to a better quality meat and save money? How about the other way around? Maybe you are paying for such high quality cuts when the chef can make a few decisions of his own and cut the food to increase the quality to the standard of the restaurant. Are there losses associated with incorrect orders from the staff to the chef or from the chef back to the staff? This could be a result of a language barrier or educating everyone on the correct terms to use.
Step 3 – Evaluate and Create Tools and Techniques to Reduce Costs
One of the most interesting moments in my career was going to a client via his back door down an alley. While walking back there, I notice a guy in the dumpster fishing around, he was decently dressed and had the apron of a cook on his chest. I asked him ‘What on earth are you looking for in there?’ He explained to me that about once a month he looks at the trash he generates to evaluate how much food leaves his restaurant as waste. Why I said? He explained to me that he wants to know if his staff is wasting food or is the customer not eating the food. If the customer is not eating the food, is it because of quality, cooking or quantity?
Makes sense to me. Look at the amount of food that hits the trash can. Don’t go to the extreme this guy did but look at the trash can. If your customer is leaving a lot of food on the table, are you providing too much quantity to him? Is it really necessary? Consider other options such as a revised menu to provide better portions or maybe reducing the amount delivered to the diner. Can you create a code system alerting the chef that the diner is a large man, increase the portion or if she is a petite woman, decrease the portion slightly? You have to address this and talk with your staff about what are ways to increase the efficiency of the volume of food provided. The key is to reduce the waste factor.
In the kitchen, are there other techniques you can incorporate into the preparation cycle to reduce the loss of food? From sharper knives to smaller containers of lesser used food ingredients, all of these should be considered in reducing the overall food costs. The seafood restaurateur I wrote about above bought this 5 pound container of olives to use for food preparation. He went through about one pound a week. In effect, he was tossing four pounds of food each week. He told me that the five pound container cost him $9, whereas the one pound container cost him $4. He thought he was saving money because of the cost per pound. How about just saving the $5 and not worry about the cost per pound on such a little needed food ingredient? I told him it is about the absolute overall cost in cash and not the value per pound of food. This is a business, not a Costco or a Sam’s Club.
One of my clients owned a Dairy Queen. DQ has specific guidelines in regards to the soft serve ice cream delivered to the customer. First off, he had a contract with the local dairy that required them to deliver any order within 48 hours of a request. My guy never kept supply in his refrigerator of more than 3 days and required not only the staff to rotate the containers but for the delivery guy to rotate them too. The cases were marked very well as to their manufactured date. The customer always received the freshest cream in that soft serve cone the market could deliver. He told me that in the four years he was in business, he had to dump cream twice. Both were due to the refrigerator’s temperature exceeding the tolerance level allowed by Dairy Queen. Not only had Dairy Queen installed a high quality control mechanism, but the owner monitored the stock and his equipment to stay in compliance. This kept his costs to well within the percentages recommended by Dairy Queen.
Summary – Controlling Food Costs
By identifying the correct quantity and quality of the food you prepare, you can begin the process of reducing the food costs in your restaurant. Take it one more step further and evaluate the flow of food and identify possible reduction points. Finally, use your staff to help you create techniques that can eliminate redundant types of costs and generate opportunities to keep costs down. As an owner, it is up to you to sit down at a table and chart this out. This is the first step in reducing the overall costs of food in your restaurant. Act on Knowledge.
Do you want to learn how to get returns like this?
Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.
There are four key principles used with value investing. Each is required. They are:
- Risk Reduction – Buy only high quality stocks;
- Intrinsic Value – The underlying assets and operations are of good quality and performance;
- Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
- Patience – Allow time to work for the investor.
If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above.
Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:
- Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
- Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
- Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.
Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:
- Lessons about value investing and the principles involved;
- Free webinars from the author following up the lessons;
- Charts, graphs, tutorials, templates and resources to use when you create your own pool;
- Access to existing pools and their respective data models along with buy/sell triggers;
- Follow along with the investment fund and its weekly updates;
- White papers addressing financial principles and proper interpretation methods; AND
- Some simple good advice.